One million savers face crippling cut to monthly income with pensioners worst-off

Almost one million savers seeking monthly income will see their returns drop in the next few weeks when they come to renew their fixed-rate bonds.

Hardest hit are pensioners with three-year deals that are nearing the end of their term. Their income may drop by £135 a year, or more than £11 a month, before tax for every £10,000 in their savings account.

The cut in income will come at the same time as they face rising energy bills and food costs.

Adding up: HSBC research shows around 400,000 bonds are maturing

Many of these savers had tied up their money in the hope rates would have risen by now. But this gamble has failed to pay off.

Three years ago, banks and building societies paid as much as 3.68 pc after tax (4.6 pc before) on deals maturing now.

Today, the top rate on three-year bonds comes from Sainsbury’s Bank at 2.6 pc (3.25 pc) — a drop of 1.35 pc before tax.

Rates have tumbled over the past few months following the drop in the wholesale money markets. The knock-on effect is lower rates on the bonds banks offer. Six months ago, banks were paying as much as 2.8 pc (3.5 pc) to savers willing to tie up their money for a year. That rate is down by at least 0.4 (0.5) percentage points.

Research from HSBC reveals that more than 400,000 bonds mature this month, and more than half a million in November.

Monthly income seekers coming to the end of two-year fixed-rate deals will also suffer a drop in income if they roll over their bonds for a similar term.

They could have seen rates of 2.72 pc (3.4 pc) from large players including Santander, Co-op and Britannia. Now, the best you can do is 2.45 pc (3.06 pc) in Saga’s postal account.

Halifax and Santander, which are among the largest savings banks, pay just 2.18 pc (2.72 pc) for savers taking out a two-year bond. Over the past two years, these savers have seen 2.52 pc (3.15 pc) with Halifax and as much as 2.76 pc (3.45 pc) with Santander.

By reinvesting with the same bank, their income will drop by as much as £73 a year before tax on each £10,000.

One-year bond holders will also see a fall. A year ago, the top rate was 2.76 pc (3.45 pc). Now it has fallen to 2.29 pc (2.86 pc).

Savers who tie up their money for five years will earn a miserly 2.87 pc (3.59 pc) with Halifax.

Nor is there any immediate prospect of better times ahead. Economists predict that interest rates will remain low until 2014, or even until 2016.

Scott Corfe, from the Centre for Economics and Business Research, predicts base rate will remain at its current level until 2016. ‘Tying up your money for more than two years could still be risky,’ he says.